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Shadow economy: Does it matter for money velocity?

Onnis, Luisanna and Tirelli, Patrizio 2015. Shadow economy: Does it matter for money velocity? Empirical Economics 49 (3) , pp. 839-858. 10.1007/s00181-015-0914-2

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The standard approach adopted in the literature exploits data on money demand to extrapolate the dynamics of the unobserved economic activity. In this paper, we explore instead the long-run effects of shadow economy measures—obtained independently from money demand functions—on the velocity of circulation of money. Empirical evidence from a panel covering 43 countries over the period 1981–2005 shows that variations in the relative size of the unrecorded sector have a negative and significant effect on the velocity of circulation of money. This is because, ceteris paribus, the higher the share of the shadow economy, the higher the demand for currency and therefore the lower the velocity of circulation of money. The negative relation between underground economic activity and velocity of circulation of money is robust to the use of different shadow economy estimates, to a sub-sample analysis and to the inclusion of a time trend.

Item Type: Article
Date Type: Published Online
Status: Published
Schools: Business (Including Economics)
Publisher: Springer
ISSN: 0377-7332
Date of Acceptance: 20 November 2014
Last Modified: 28 Sep 2022 16:30

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